I attach my comments on the Commission's concept release International Accounting Standards.

My comments are based on considerable experience of working with International Accounting Standards. I served as the IASC's secretary-general from 1985 to 1994 during which time the IASC carried out all or substantially all of the work on 20 of the core standards recently endorsed by IOSCO and developed its Framework for the Preparation and Presentation of Financial Statements.

From 1995 to date, I have provided consultancy and training services relating to IASs to companies, investment banks, accounting firms, business schools, stock exchanges and governments in 20 countries. I am also the author of Applying International Accounting Standards (widely recognised as the authoritative text on the application of IASs) and the International Accounting Standards Survey 1999 which dealt with how 125 large companies apply IASs.

The concept release is a further important step in a 13 year process aimed at allowing the use of IAS financial statements, without reconciliation or modification, for cross border listings and capital raising. It is important that further steps are taken which recognise the considerable progress made by both the IASC and IOSCO in those 13 years. Therefore, the key points in my comments are:

IASs provide a sufficiently comprehensive accounting framework dealing with the fundamental accounting issues that are encountered in a broad range of industries and a variety of transactions;

Properly prepared IAS financial statements should result in at least the same level of transparency and comparability that is generally provided in properly prepared US GAAP financial statements;

the SEC should accept properly prepared IAS financial statements from foreign issuers without reconciliation or modification - any continuing reconciliation requirement should be limited to the items specified in the IOSCO endorsement of IASs and should be eliminated within five years;

while IASs are of sufficiently high quality, the International Accounting StandardsSurvey 1999 revealed that some IAS financial statements are not properly prepared or audited; and

IOSCO should establish a joint international process to achieve consistent interpretation and application of IASs by listed companies.

I would be pleased to provide you with further assistance on this important issue. In particular, I would be pleased to discuss these issues further with members of the Commission and the SEC staff during the opportunities created by several forthcoming visits to the United States. Please contact me, therefore, if you like to take advantage of these opportunities or require further assistance.

Yours faithfully

David Cairns

Attachment:

Detailed comments on the concept release, International Accounting Standards

Concept Release INTERNATIONAL ACCOUNTING STANDARDS (file S7 04 00)

Comments of David Cairns

Are the Core Standards Sufficiently Comprehensive?

Q.1 Do the core standards provide a sufficiently comprehensive accounting framework to provide a basis to address the fundamental accounting issues that are encountered in a broad range of industries and a variety of transactions without the need to look to other accounting regimes? Why or why not?

Current IASs provide a sufficiently comprehensive accounting framework which deals with the fundamental accounting issues that are encountered in a broad range of industries and a variety of transactions. It is inevitable, however, that there are accounting issues which are not yet covered by IASs in the same way that there are accounting issues which are not yet covered by some national standards including US GAAP. It would be unreasonable for the SEC to reject FASB standards because of the gaps in US standards; it would be equally unreasonable for the SEC to reject IASs because of similar gaps in IASs.

It is important to recognise that the list of `core standards' was determined by IOSCO in 1993 as `the necessary components of a reasonably complete set of accounting standards that would comprise a comprehensive body of principles for enterprises undertaking cross-border offerings and listings'1 The IASC's completion of these core standards and IOSCO's recent endorsement of the appropriate IASs confirms that IASs represent a reasonably complete set of accounting standards for use in cross-border offerings and listings.

The completion of the core standards is the culmination of more than 25 years work by the IASC. Over the last 13 years, the IASC has revised and improved substantially virtually all existing IASs and has added approximately ten new IASs. Representatives of IOSCO, often including SEC staff members, have participated extensively in this work.

Q.2 Should we require use of U.S. GAAP for specialized industry issues in the primary financial statements or permit use of home country standards with reconciliation to U.S. GAAP? Which approach would produce the most meaningful primary financial statements? Is the approach of having the host country specify treatment for topics not addressed by the core standards a workable approach? Is there a better approach?

IASs deal with a number of specialised industries. Furthermore virtually all general IASs are as applicable in specialised industries as they are in non-specialised industries.

Where there are gaps in IASs, whether for specialised industry issues or other issues, the SEC should require compliance with paragraph 20 and related guidance in IAS 1 Presentation of Financial Statements2 This approach is both consistent with an overall requirement to comply with IASs and similar to that which the IASC itself would adopt when developing an IAS on a new issue.

US GAAP or home country standards should be used only when they meet the requirements of IAS 1.

Q.3 Are there any additional topics that need to be addressed in order to provide a comprehensive set of standards?

There are no topics which need to be addressed in order to provide a comprehensive set of standards.

As explained in the answer to question 1, it is inevitable that there are accounting issues which are not yet covered by IASs in the same way that there are accounting issues which are not yet covered by some national standards including US GAAP. It would be unreasonable for the SEC to reject FASB standards because of the gaps in US standards; it would be equally unreasonable for the SEC to reject IASs because of similar gaps in IASs.

Are the IASC Standards of Sufficiently High Quality? Why or Why Not?

Q.4 Are the IASC standards of sufficiently high quality to be used without reconciliation to U.S. GAAP in cross-border filings in the United States? Why or why not? Please provide us with your experience in using, auditing or analyzing the application of such standards. In addressing this issue, please analyze the quality of the standard(s) in terms of the criteria we established in the 1996 press release. If you considered additional criteria, please identify them.

IASC standards are of sufficiently high quality that properly prepared IAS financial statements result in at least the same level of transparency and comparability that is generally provided to US investors under US GAAP. Therefore, the SEC should accept IAS financial statements from a foreign issuer without a reconciliation to US GAAP.

IASs have been are developed so as to provide relevant and reliable information for a wide range of users in making economic decisions. In particular:

IASs are consistent with the IASC's Framework for the Preparation and Presentation of Financial Statements which is similar to the FASB's conceptual framework;

as a result of the efforts which started in 1987, IASs now allow few free choices of alternative accounting treatments3 and

IASs require the use of consistent accounting policies from one period to the next although, as with all national standards (including US GAAP) they allow a change in these policies in limited circumstances.

While IASs are of sufficiently high quality, there are both compliance and enforcement issues associated with the preparation and audit of IAS financial statements which need to be addressed. These issues are dealt with in my responses to questions 9 to 18.

Q.5 What are the important differences between U.S. GAAP and the IASC standards? We are particularly interested in investors' and analysts' experience with the IASC standards. Will any of these differences affect the usefulness of a foreign issuer's financial information reporting package? If so, which ones?

The important differences between US GAAP and IASs are dealt with well in the second edition of FASB's comparison between IASs and US GAAP4 From my discussions with analysts, it is doubtful whether any of these differences will affect the usefulness of the financial statements.

Q.6 Would acceptance of some or all of the IASC standards without a requirement to reconcile to U.S. GAAP put U.S. companies required to apply U.S. GAAP at a competitive disadvantage to foreign companies with respect to recognition, measurement or disclosure requirements?

The acceptance of some or all IASs from foreign issuers would not put US companies at a competitive disadvantage.

Virtually all countries other than the USA allow foreign issuers to use IASs or foreign standards without a reconciliation to domestic standards. There is no evidence that domestic issuers in such countries feel they are at a competitive disadvantage to foreign issuers. For example, UK companies have not argued that they are at a competitive disadvantage because foreign issuers on the London stock exchange may use IASs, US GAAP or (in certain cases) their domestic standards in place of UK GAAP.

Q.7 Based on your experience, are there specific aspects of any IASC standards that you believe result in better or poorer financial reporting (recognition, measurement or disclosure) than financial reporting prepared using U.S. GAAP? If so, what are the specific aspects and reason(s) for your conclusion?

Both IASs and US GAAP are high quality and it is difficult to argue that, where there are differences, one requirement is better or poorer than the other. Differences between standards arise for a variety of reasons even when they are based on the same or similar conceptual frameworks. Differences sometimes arise even when there is a consensus among different standard setters on the better treatment - all standard setters, including the IASC and the FASB, sometimes have to compromise on some poorer treatments in return for making some progress towards better treatments.

On page 16 of the concept release, the SEC lists a number of issues where its staff have raised concerns about the requirements in IASs. The release implies that on these issues (among others) the application of the IAS treatment will result in poorer financial reporting than would be the case under US GAAP. This is not necessarily the case. For example:

the SEC staff is concerned about the `fair presentation override' in IAS 1 but the application of that override in the very limited circumstances permitted by IAS 1 would result in more relevant and reliable information than would otherwise be the case - in the same circumstance, US GAAP requires compliance with a standard notwithstanding that its application would be misleading;

the SEC staff is concerned about the use of fair values for the measurement of property, plant and equipment but such information is more relevant to users than historical cost information and the fair value information is reliable provided that it is determined in accordance with IAS 16 and the appropriate International Valuation Standards5- US GAAP always requires the use of less relevant historical cost information; and

the SEC staff is concerned about the requirement in IAS 38 to capitalise costs related to internally developed intangible assets when it is probable that those costs will give rise to future economic benefits - US GAAP requires most of these costs to be written off as an expense but, somewhat inconsistently, requires certain software development costs to be capitalised6

The list in the concept release is indicative of one of the more disappointing aspects of IOSCO's evaluation of IASs over the last 13 years . This has been, and still is, the tendency to favour current requirements in a regulator's home country rather than support superior different requirements in IASs. All IOSCO members should focus on `good accounting' and improvements to existing standards irrespective of the fact that the resulting treatments may differ from those required by their existing treatments.

Can the IASC Standards be Rigorously Interpreted and Applied?

Q.8 Is the level of guidance provided in IASC standards sufficient to result in a rigorous and consistent application? Do the IASC standards provide sufficient guidance to ensure consistent, comparable and transparent reporting of similar transactions by different enterprises? Why or why not?

Yes, to both questions. Since 1990, significant improvements have been made to the level of guidance in IASs such that it is now sufficient to ensure rigorous and consistent application of the standards. However, as with a number of other questions in the concept release, the major problem is one of enforcement rather than of the quality of the standards themselves.

On page 19, the concept release discusses the use of principles rather than more detailed standards. This is largely a matter of semantics rather than substance - furthermore some IASs are more detailed than equivalent US standards. The difference also reflects that fact that while the FASB might need to deal with the application of its standards to all the transactions and events which affect US companies, it is generally impossible for the IASC to deal with the application of IASs to all the transactions and events which affect all companies (or even all listed companies) around the world.

IASs should be, and are, sufficiently detailed to ensure that like transactions and events are accounted for in a like way wherever they take place and wherever they are reported. Each IAS includes guidance on how it should be applied to transactions and events which arise in all, or a substantial number of, countries. However, IASs cannot always include guidance on how the standards should be applied to the specific circumstances of each country. National standard setters should take responsibility for providing this guidance. This process is not yet sufficiently developed but the SEC and other IOSCO members should insist on consistent applications of IASs within countries as a condition of accepting IAS financial statements for cross-border listings (see answer to question 18).

Page 19 of the concept release discusses the use of black and grey lettering in IASs and argues that compliance with both is required. The SEC's position is consistent with that which the IASC adopted at the beginning of the improvements project in 19907. The black lettering set out the standards which must be applied to appropriate and material items for financial statements to comply with IASs. The grey letters explain how to apply the standards but recognise that the circumstances of enterprises may vary. An enterprise must follow the guidance paragraphs in appropriate circumstances otherwise its financial statements would not comply with IASs. On the other hand, it should not follow guidance which is not appropriate to its circumstances.

Q.9 Are there mechanisms or structures in place that will promote consistent interpretations of the IASC standards where those standards do not provide explicit implementation guidance? Please provide specific examples.

There are four mechanisms which are in place to promote consistent interpretations of IASs:

the IASC board and its individual members;

the standing interpretations committee (SIC) of the IASC;

the IASC staff; and

national standard setting bodies.

The board should ensure each IAS includes guidance on how it should be applied to transactions and events which arise in all, or a substantial number of, countries. Each national standard setter should issue guidance on the application of each IAS in the specific circumstances of its country.

The SIC is primarily responsible for providing guidance when IASs do not provide explicit guidance. IASC board members and the IASC staff also have an important role to play in sending out consistent and accurate messages about IAS requirements.

Q.10 In your experience with current IASC standards, what application and interpretation practice issues have you identified? Are these issues that have been addressed by new or revised standards issued in the core standards project?

I have dealt with many application and interpretation issues both in my former role as secretary-general of the IASC and in my current role as a consultant, author and trainer. Some of these issues have been dealt with in the core standards project (but this project dealt with only a third of the core standards). Some issues have not yet been dealt with. Many application and interpretation issues have arisen out of the new and revised IASs approved during the core standards project (as the report of IOSCO's technical committee confirms). It is, however, important to recognise that the application and interpretation problems arise in respect of all national standards, including US GAAP.

The outstanding issues and other new issues relating to IASs should be dealt with by the mechanisms described in my answer to question 9. However, I continue to believe that the IASC also needs an effective and efficient `housekeeping' mechanism to modify IASs for application and interpretation issues which arise after an IAS is approved. Such a mechanism should form part of the IASC's procedures and complement the work of the SIC. It would deal with consequential changes arising as a result of the issuance of new and revised IASs as well as with unintended, minor errors in IASs. The need for this additional mechanism should not delay the SEC's acceptance of IASs.

Q.11 Is there significant variation in the way enterprises apply the current IASC standards? If so, in what areas does this occur?

Yes. The International Standards Survey 19998revealed considerable variety in the approaches to IAS compliance adopted by 125 survey companies which refer to the use of IASs in their financial statements. Many survey companies complied fully with IASs. Many specified exceptions from full compliance or used IASs for only some items. Among the companies which claimed full compliance, they were many instances of material omissions or other non-compliance with IASs.

Some of Europe's largest companies which refer to the use of IASs did not comply fully with all IAS requirements. For example, in their 1998 financial statements:

Roche did not disclose all the required information about its geographical segments;

Eni used IASs only in the absence of Italian requirements;

Nokia omitted IAS disclosures on pensions and segments;

ING used IASs `where possible' - some of its accounting policies do not comply with IASs;

RWE supplemented its German GAAP financial statements with `information pursuant to IASs';

LVMH and Saint-Gobain deferred the application of the revised IAS on goodwill; and

Renault complied with all IASs except that on research and development.

The issue of compliance is complicated by the approach adopted by auditors. The auditors of only 57% of the 125 survey companies expressed an opinion on compliance with IASs. The forms of their opinions varied considerably even when issued by the same firm in the same country. Furthermore, the auditors of three survey companies (Saint-Gobain, Valeo and Roche) expressed `unqualified opinions' notwithstanding that the companies themselves disclosed exceptions from full IAS compliance. The form of the unqualified opinion was different in each case; PricewaterhouseCoopers was the auditor or a joint auditor in each of the three cases.

These variations in the approaches adopted by companies and their auditors should not delay the SEC's acceptance of IASs. Rather the SEC should accept IAS financial statements from foreign issuers (with or without a reconciliation to US GAAP) only when those financial statements comply fully with IASs. Indeed the efforts of the SEC and other regulators could do much to improve generally the level of compliance with IASs and appropriate reporting by auditors.

The IASC cannot enforce compliance with IASs, any more than any national standard setting body, including the FASB, can enforce compliance with its standards, Nevertheless, the IASC could take a number of steps to strengthen its messages about compliance. Some recommendations about the IASC's policies, practices and appointments are included in the International Accounting Standards Survey 19999

The Need for a Financial Reporting Infrastructure

Q.12 After considering the issues discussed in (i) through (iv) below, what do you believe are the essential elements of an effective financial reporting infrastructure? Do you believe that an effective infrastructure exists to ensure consistent application of the IASC standards? If so, why? If not, what key elements of that infrastructure are missing? Who should be responsible for development of those elements? What is your estimate of how long it may take to develop each element?

The essential elements of an effective financial reporting infrastructure are, as identified in the concept release:

an independent standard setting body;

an active advisory function;

a sound due process;

an effective interpretative function;

independent oversight representing the public interest; and

adequate funding and staffing.

As far as the IASC is concerned, I would emphasise four other things:

the need for technical expertise in international accounting issues;

the need for knowledge and experience of IASs;

an understanding of the nature and structure of business events and transactions in different countries; and

a commitment to co-operation with national standard setting bodies.

The IASC has been remarkably successful over the last 27 years in terms of the quality of both its output and structure. It is important, however, to recognise how both IASs and the IASC's structure and process have evolved over the years - all are very different from the 1970s but nothing would have been achieved without the foundations laid in the early years.

I support strongly the changes which are now being made, indeed I proposed similar changes several years ago10 It is important that the changes work properly so that further progress is made. In the interests of achieving that aim, there are three points which I would like to emphasise:

the trustees must carry out their tasks fully and effectively -the current advisory council, which has many of the same tasks and powers as the trustees, has singularly failed to carry out its responsibilities and exercise its powers for the past five years,

the work of the new board must be supported by comprehensive staff research and be supported by highly competent administrative staff - in the past, both notions have been controversial; and

the work of the IASC must be driven by a commitment to the public interest - the recent practice of favouring, even promoting, particular accounting firms must be discontinued.

The Interpretative Role of the Standard-Setter

Q.13 What has your experience been with the effectiveness of the SIC in reducing inconsistent interpretations and applications of IASC standards? Has the SIC been effective at identifying areas where interpretive guidance is necessary? Has the SIC provided useful interpretations in a timely fashion? Are there any additional steps the IASC should take in this respect? If so, what are they?

The establishment of the SIC was both an important and necessary step. However, experience of the output of the SIC has been mixed. While some interpretations have been useful, others have not been helpful and may have been counter-productive. One possible cause of the problems is insufficient knowledge and experience of IASs among SIC members. Another cause is the apparent restriction on the research carried out by the IASC staff.

Some SIC interpretations merely confirm existing IAS requirements. This creates uncertainty about the status of all IAS requirements and inconsistent approaches to compliance with those requirements. A good example is SIC 9 on unitings of interests and acquisitions. It is widely acknowledged that SIC 9 changed nothing; it merely confirmed the existing requirements of IAS 22. However, the 1999 financial statements of Novartis imply that the merger of Sandoz and Ciba-Geigy is a uniting of interests only because it was consummated prior to SIC 9 (this case is further confused by the fact that the merger appears not to be a uniting of interests under the SEC's interpretation of IAS 22)11 The implication is that had the merger been consummated after SIC 9 it might not have been a uniting of interests. This is an absurd - the merger was either a uniting of interests both prior to after SIC 9 or an acquisition both prior to after SIC 9. The example sets a worrying precedent - unscrupulous companies and auditors might conclude that IASs are ineffective until they are confirmed by the SIC.

Another problem is the relationship between interpretations and earlier board decisions. For example, SIC 1 overturned a formal IASC board vote on mixing the use of LIFO and FIFO/weighted average cost12 The successive draft interpretations on reporting currency (SIC D19) appear to ignore board decisions on IAS 21 and IAS 29. While board decisions may need to be changed, it is unclear whether the SIC has the power to make such changes. If the SIC has such power, it should exercise it only after comprehensive staff research into the board's earlier positions.

The IASC needs to improve further the work of the SIC; some of the improvements will flow from the restructuring of the IASC. They include:

the appointment to the SIC of more people who are familiar with, and have experience of, IASs;

comprehensive IASC staff research on all issues prior to their consideration by the SIC; and

clarification of the responsibilities of the SIC for dealing with changes to prior board decisions.
The need for these improvements should not, however, delay the SEC's acceptance of IASs.

Q.14 Do you believe that we should condition acceptance of the IASC standards on the ability of the IASC to restructure itself successfully based on the above characteristics? Why or why not?

No, but this question is no longer relevant as the restructuring has been approved.

The Role of the Auditor in the Application of the Standards

Q.15 What are the specific practice guidelines and quality control standards accounting firms use to ensure full compliance with non-U.S. accounting standards? Will those practice guidelines and quality control standards ensure application of the IASC standards in a consistent fashion worldwide? Do they include (a) internal working paper inspection programs and (b) external peer reviews for audit work? If not, are there other ways we can ensure the rigorous implementation of IASC standards for cross-border filings in the United States? If so, what are they?

I am unable to answer this question.

Q.16 Should acceptance of financial statements prepared using the IASC standards be conditioned on certification by the auditors that they are subject to quality control requirements comparable to those imposed on U.S. auditors by the AICPA SEC Practice Section, such as peer review and mandatory rotation of audit partners?Why or why not? Why or why not? If not, should there be disclosure that the audit firm is not subject to such standards?

Ideally, acceptance of IAS financial statements should be conditioned on compliance by the auditors with International Standards of Auditing (ISAs) and the related standards and guidance issue by the International Federation of Accountants. The SEC, together with other IOSCO members, should work towards the rapid re-instatement of the 1992 IOSCO endorsement of ISAs. Until that is done, compliance with US or comparable requirements is reasonable.

Q.17 Is there, at this time, enough expertise globally with IASC standards to support rigorous interpretation and application of those standards? What training have audit firms conducted with respect to the IASC standards on a worldwide basis? What training with respect to the IASC standards is required of, or available to, preparers of financial statements or auditors certifying financial statements using those standards?

Expertise is available and some of it is of high quality. However, my experience suggests that there is a shortage of expertise and that some of the claimed expertise is of insufficient quality.

Along with many others, I have provided training and other guidance on the application of IASs to preparers, auditors and users of IAS financial statements. This training and guidance is based on knowledge and experience of IASs and the recognition that the training and guidance must be based on IASs and the relationships among different IASs. Extensive use is also made of IASC sources.

As the concept release identifies, however, the vast majority of accountants and auditors are trained in their national GAAPs and require retraining when faced with applying IASs. In my experience, too many accountants place too much reliance on their national GAAPs when applying IASs with the result that material errors occur. For example, many of the compliance errors I found when reviewing IAS financial statements of listed companies on behalf of a stock exchange resulted from the use of UK GAAP either to interpret IASs or as a substitute for IASs. The errors were compounded, in my view, by the fact that virtually all the IAS financial statements had been audited by the then big six accounting firms all of whom claim common, global standards and expertise in IASs.

Excessive reliance on national GAAP is also evident among the authors of some IAS text books, for example Epstein and Mirza rely heavily on US GAAP in their text with the result there are significant errors and omissions in the text. Users of IAS text books need to be selective about their choice of texts. The IASC and IFAC need also to be cautious in their endorsement of particular texts.

The Role of the Regulator in the Interpretation and Enforcement of Accounting Standards

Q.18 Is there significant variation in the interpretation and application of IASC standards permitted or required by different regulators? How can the risk of any conflicting practices and interpretations in the application of the IASC standards and the resulting need for preparers and users to adjust for those differences be mitigated without affecting the rigorous implementation of the standards?

Yes, there is a significant variation in the interpretation and application of IASs by different regulators. The variations affect both the scope of application of IASs and the interpretation of IASs.

The London stock exchange has for many years allowed foreign issuers to report under IASs instead of UK GAAP. However, for a considerable time, it did not require foreign issuers to comply with IAS 14, hence allowing a variation in the scope of IASs. Furthermore, it is clear that the level of enforcement with IASs was not high and that some foreign issuers were excused compliance with other IAS requirements in addition to exemption from IAS 1413

In continental Europe, it appears that there is very little regulatory enforcement of compliance with IASs by companies which choose to report under IASs. Insofar as there is enforcement, companies are allowed to apply only some IASs or some parts of IASs. In some cases, the only enforcement comes from auditors and, as the International Accounting Standards Survey 1999 shows, many auditors do not express an opinion on IAS compliance and those that do express an opinion adopt varying practices14

It is highly desirable that there should be consistent interpretation and application of IASs, particularly by companies listed on major stock exchanges. The SEC has already the powers to achieve consistent interpretation and application of IASs by those foreign companies which fall within its jurisdiction. The problem is that other regulators may hold different opinions on the consistent interpretation and application of IASs by the same countries. IOSCO should take the lead in establishing a joint process to achieve consistent interpretation and application of IASs by listed companies.

Q.19 Would further recognition of the IASC standards impair or enhance our ability to take effective enforcement action against financial reporting violations and fraud involving foreign companies and their auditors? If so, how?

Probably not as the SEC already has extensive powers.

Q.20 We request comment with respect to ways to assure access to foreign working papers and testimony of auditors who are located outside the United States. For example, should we amend Regulation S-X to require a representation by the auditor that, to the extent it relied on auditors, working papers, or information from outside the United States, the auditor will make the working papers and testimony available through an agent appointed for service of process? If not, should we require that the lack of access to auditors' workpapers be disclosed to investors? Is there another mechanism for enhancing our access to audit working papers?

I am unable to answer this question.

Possible Approaches to Recognition of the IASC Standards for Cross-Border Offerings and Listings

Q.21 What has been your experience with the quality and usefulness of the information included in U.S. GAAP reconciliations? Please explain, from your viewpoint as a preparer, user, or auditor of non-U.S. GAAP financial statements, whether the reconciliation process has enhanced the usefulness or reliability of the financial information and how you have used the information provided by the reconciliation. Please identify any consequences, including quantification of any decrease or increase in costs or benefits, that could result from reducing or eliminating the reconciliation requirement.

There is research which shows that reconciliations provide some useful information and other research that shows that analysts and other users can cope with accounting diversity. My own conversations with analysts suggest two things:

they use the full financial statements in their models rather than information provided by any reconciliations; and

they find properly prepared IAS financial statements as useful and reliable as US GAAP financial statements.

The value of information in reconciliations is affected by the nature of those items. Some reconciling items are more understandable and more predictable that others. For example, many foreign issuers in the US include a reconciling item for the capitalisation of borrowing costs15. The item is understandable and reliable and it is reasonably predictable by analysts should they wish to make predictions about future adjustments.

Other reconciling items are less understandable and probably of little value. For example, most reconciling items on retirement benefit or pension costs result from the application of a combination of different recognition and measurement rules and different transitional rules in IASs/national GAAPs and US GAAP. These reconciling items are probably meaningless.

Some reconciling items are so pervasive that the they convey little information and therefore have little value. For example, reconciling items relating to the choice of method for business combinations are usually very large and combine the effects of multiple adjustments. In these cases, analysts would be better served by the issuance of fully restated financial statements; they may be adequately served, however, by the unreconciled IAS/national GAAP financial statements.

Q.22 Should any requirements for reconciliation differ based on the type of transaction (e.g., listing, debt or equity financing, rights offering, or acquisition) or the type of security (e.g., ordinary shares, convertible securities, investment grade or high yield debt)? Are there any other appropriate bases for distinction?

No, to both questions.

Q.23 If the current reconciliation requirements are reduced further, do you believe that reconciliation of a "bottom line" figure would still be relevant (e.g., presenting net income and total equity in accordance with U.S. GAAP)?

It is important that further steps are now taken which recognise the considerable progress made by both the IASC and IOSCO in the 13 years during which they have addressed the use of IAS financial statements, without reconciliation or modification, for cross border listings and capital raising. In recognition of that progress, the SEC should accept properly prepared IAS financial statements from foreign issuers without reconciliation or modification.

Insofar as the SEC decides to retain a reconciliation requirement. the reconciliation should be limited to those items specified in the IOSCO May 2000 endorsement of IASs16 Furthermore, the SEC together with other members of IOSCO and the IASC and national standard setting bodies should seek to eliminate these reconciling items by amendments to either IASs or the IOSCO endorsement within, say, five years.

Q.24 Should any continuing need for reconciliation be assessed periodically, based on an assessment of the quality of the IASC standards?

Insofar as a reconciliation requirement is retained, it should be reassessed periodically.

Q.25 The IASC standards finalized as part of the core standards project include prospective adoption dates. Most standards are not required to be applied until fiscal years beginning on or after January 1, 1998, at the earliest. Should we retain existing reconciliation requirements with respect to the reporting of any fiscal year results that were not prepared in accordance with the revised standards or simply require retroactive application of all revised standards regardless of their effective dates? If not, why not?

Both IASs and US GAAP include transitional rules for the adoption of new standards. As the SEC allows domestic and foreign issuers to use the transitional rules in US GAAP, it should allow foreign issuers reporting under IASs to use the transitional rules in IASs. However, there are two issues which need to be addressed further:

conflicts between the transitional rules of different standard setters; and

the volume and appropriateness of transitional rules in IASs.

There are a number of cases where both IASs and US GAAP have transitional rules but these rules are different either in their nature or their timing. This means that some foreign issuers have to reconcile from IAS transitional rules to US GAAP transitional rules - the most notable example is employee benefit/pension costs. Immediate consideration should be given to the elimination of these reconciliation requirements.

Now that the core standards are completed, the IASC should reconsider the nature and appropriateness of all its transitional rules. Some of these rules may no longer be necessary and could be eliminated as part of an IAS `housekeeping' exercise. Others may still be current but should be reconsidered and eliminated if possible. For example the transitional provisions in IAS 17 (revised) are surprising and inappropriate and should be eliminated17

The most troublesome and complex transitional requirements relate to business combinations, indeed, in some current IAS/US GAAP reconciliations, substantial reconciling items arise from the effects of these transitional rules. These rules should be reconsidered. One solution would be for the IASC to eliminate these rules in return for the SEC's removal of the reconciliation requirement. At the very least, the IASC should seek to simplify these transitional rules.

Q.26 Does the existence of a reconciliation requirement change the way in which auditors approach financial statements of foreign private issuers?

The answer should be `no' (all other things being equal).

Will other procedures develop to ensure that auditors fully versed in US auditing requirements, as well as the IASC standards, are provided an opportunity to review the financial reporting practices for consistency with those standards? If so, please describe these procedures.

If the SEC requires the audit to be carried out in accordance with US auditing standards (pending IOSCO's re-endorsement of ISAs), it is inevitable and necessary that an auditor fully versed in US auditing requirements, as well as IASs, reviews the financial statements. If the SEC allows the audit to be carried out in accordance with ISAs, such a review is unnecessary.

Alternatively, will the quality of the audit and the consistency of the application of the IASC standards depend on the skill and expertise of the local office of the affiliate of the accounting firm that conducts the audit?

While the quality of the audit and the consistency of the application of IASs must depend on the skill and expertise of the people carrying out the audit, all offices of international firms should operate in accordance with global quality control standards. The results of the International Accounting Standards Survey 1999 suggested, however, that this is not always the case (or that some firms have very poor global standards).

Bibliography

David Cairns (1993), `The Contribution of International Accounting Standards', at the IASCs 20th anniversary conference, The International Capital Markets and the Harmonisation of International Accounting Standards, 29 June 1993

David Cairns (1998), `The Future of the IASC and the Implications for UK Companies', in Financial Reporting Today - Current and Emerging Issues, The 1998 Edition, Accountancy Books

Paragraph 20 is troublesome as it is not written in language appropriate for a standard, uses different language from the rest of IAS 1and elevates `prudence' above its position in both IAS 1 [1975] and the framework. The supporting guidance in paragraph 22 is much better. See Cairns (1999a), pp 228-9

Some of the choices that remain reflect, at least in part, the divergent views among IOSCO members. In particular, it is likely that the IASC would have eliminated the choice in IAS 2 between FIFO/weighted average cost and LIFO had IOSCO not commented, at a very late stage, that the IASC was `going to far' in seeking eliminate LIFO. See also Cairns (1999a), p496 and 506-9.

While the IASC's treatment is preferable to current US GAAP, it is far from perfect not least because only some costs are capitalised whereas other costs of the same project are expensed. However, it would be preferable to resolve the imperfections in IAS 38 rather than require the immediate expensing of costs which give rise to future economic benefits.

Prior to the improvements project, the grey lettering often included descriptions of accounting treatments which were not permitted by the black lettering. For example, the grey lettering in IAS 2 [1975] described a number of ways in which some companies made excessive write-downs to inventories whereas these write-downs were not permitted by the black lettering. The inclusion of this sort of material confused some users of IASs and the practice was dropped in new, revised and reformatted IASs issued after 1990.

The responsibility for determining and administering the listing rules has passed recently to the Financial Services Authority which may adopt a different rules or a different approach to compliance with its rules.

IOSCO, appendix B, pp5-8. Some of the reconciling items should not arise in IAS/US GAAP reconciliations, for example those relating to the recognition of deferred tax assets and the amortisation of goodwill. Some reconciling items suggest a misunderstanding of the requirements of IASs, for example the IAS 17 item appears not to acknowledge the important distinction in IAS 17 between operating leases and finance leases.